In re: Stephens, No. 10-1450-JDP (Bankr. D. Idaho, May 10, 2011).
Can a debtor use an exemption in another state, especially if it is more favorable?
When a petition for bankruptcy is filed, all property of the debtor becomes property of the estate available for distribution to the debtor's creditors. However, the debtor may take certain exemptions under federal or state law, which removes that property up to allowed amounts from the estate. The goal of the statute is to permit debtors reasonable possessions, such as a home, a car, certain personal items such as clothing, and food. The provisions for exemptions prevent destitution of the debtor after the filing of bankruptcy.
In every state, there is a homestead exemption which allows a debtor to claim as exempt from his estate a home up to a certain amount in value. In Idaho, a debtor may exempt up to $100,000 of equity in a homestead. Idaho Code § 11-609. If this exemption is not taken properly, it may be challenged by the trustee, but the statute is to be construed in the debtor's favor.
In this case, the trustee challenged the debtor's exemption because the home in question was outside of the state of Idaho. Although not required by the statutes creating the homestead exemption, the case law in Idaho had held that the exemption could only be applied to homes within Idaho in order to prevent "exemption shopping" (i.e., using a more favorable exemption in another state to get around the policies and provisions of the state in which you file). Additionally, the courts in Idaho had promoted the policy of protecting creditors' expectations, reasoning that a creditor who lends to a debtor in Idaho expects a debtor to be able to use only the Idaho exemptions and plans accordingly.
The court stood by its previous reasoning and denied the debtors the right to use the Idaho exemption on property existing in another state. In this case, the debtor actually lived in his Alaska home, and the denial would most certainly mean a loss of the home. Despite the harsh result, the court was not persuaded to overturn its prior rulings. It is important for a debtor to be made aware of these types of rules prior to filing his bankruptcy petition in order to plan for the best possible outcome. Only a qualified attorney can best apprise a debtor of his rights in bankruptcy court.
